Economy Shrinks 1.3 Percent in Q3, Weakest Performance in Decade

The U.S. economy turned in its weakest performance in a decade in the third quarter, shrinking at an annual rate of 1.3 percent, an even bigger drop than the government previously estimated.

The revised reading of gross domestic product released by the Commerce Department on Friday showed that consumers were frugal, companies sharply cut investment and businesses slashed excess stocks of unsold goods — all factors contributing to the dismal showing in the July-September quarter.

GDP is the total output of goods and services produced within the United States and is considered the broadest measure of the economy's health.

The government previously estimated that the economy contracted at a rate of 1.1 percent in the third quarter and its initial estimate pegged the decline at a 0.4 percent rate.

The revised 1.3 percent rate of decline was based on more complete data and marked the weakest performance since the economy contracted at a rate of 2 percent in the first quarter of 1991, when the country was suffering through its last recession.

Some analysts believe the current quarter will be even weaker, with the economy shrinking at a rate of at least 1.5 percent.

Friday's report showed just how dramatically and quickly the economy — which has been stuck in a more than yearlong slump and was dealt a severe blow by the Sept. 11 terror attacks — has deteriorated.

In the first three months of this year, the economy grew at an anemic 1.3 percent rate and in the second quarter it expanded by a barely discernible 0.3 percent growth rate.

The National Bureau of Economic Research recently declared that the country had tipped into recession in March, ending the longest expansion in U.S. history and beginning the first downturn in a decade.

To prevent the economy from sinking deeper into recession, the Federal Reserve has cut interest rate 11 times this year, driving borrowing costs for consumers and businesses down to the lowest point since November 1965.

On Capitol Hill, partisan wrangling over how best to revive the economy snuffed out the prospects for an economic stimulus package this year.

Much of the economy's slump has come from a sharp pullback in capital spending. Friday's GDP report showed that business investment in new plants and equipment fell at a rate of 8.5 percent in the third quarter, following an even steeper 14.6 percent plunge in the second quarter.

Consumer spending, the lifeblood of the economy, grew at a 1 percent rate in the third quarter, the weakest showing since the first quarter of 1993, and a big pullback from the 2.5 percent growth rate posted in the second quarter. Consumer spending accounts for two-thirds of all economic activity.

Businesses' inventory reduction totaled a record $61.9 billion in the third quarter, another factor in the third-quarter's weak performance. In the long run, it's positive for businesses to get rid of excess stocks of unsold goods because it sets the stage for ramped up production in the future. But the process subtracts from the GDP.

Friday's report also showed that after-tax profits of U.S. corporations fell at a rate of 6.8 percent, reflecting the impact of the terror attacks and the sour economy. In the second quarter, profits declined at a 1.7 percent rate.